[October 11–October 15] Trade strategy considering commodity prices and U.S. interest rates

Last Week's Exchange Rate Range (Trading Range)

Last Week's Exchange Rate Summary

USD/JPY

• Last week, the USD/JPY started at 110.99 yen per dollar. At the beginning of the week, there was a tug-of-war around 111 yen, but gradually dollar buying dominated and the pair trended higher. There was a period of hesitation around 111.50 due to heavy option selling pressure, but after breaking 111.50 in the late Thursday session, the upward trend continued. The closely watched U.S. September employment report showed mixed results, reflecting market confusion and causing the pair to swing up and down. As we approached the close, dollar buying strengthened, breaking above 112 to reach a high of 112.26 and finally closing at 112.22.

EUR/USD

• The euro started at 1.1593 dollars. Early in the week euro buying dominated, pushing to 1.1640. As the market gradually shifted to dollar buying, euro selling intensified, briefly dropping below the recent low around 1.1570 to 1.1530. Thereafter, as cross-yen buying returned, the euro gradually recovered and closed near 1.1569.

USD/CNH

• The yuan started at 6.4456 per dollar. The currency remained relatively range-bound through Thursday due to the National Day holidays. On Friday, after the U.S. September employment data, dollar strength rose and the yuan strengthened further, finishing the week modestly higher against the dollar at 6.4431.

Last Week's Events

4th

• China: National Day holiday (October 1–7)
• Japan: September monetary base (year-over-year) +11.7%
• U.S.: August durable goods new orders (m/m) +1.2%
• Taiwan’s Ministry of National Defense announced that 56 Chinese fighters entered the Air Defense Identification Zone (ADIZ). It was the highest number on record, with 149 incursions over the past four days. China has intensified its show of force,.
• WTO projected world merchandise trade to grow 10.8% in 2021, up from March's 8% forecast. This reflects economies reopening worldwide due to vaccine rollouts.

5th

• Tokyo All City September Consumer Price Index +0.1%
• Reserve Bank of Australia kept interest rate at 0.10%
• Eurozone September Services PMI 56.4
• Eurozone August Producer Price Index +13.4%
• U.S. August Trade Balance −$73.3 billion
• U.S. September ISM Non-Manufacturing composite 61.9

6th

• Hong Kong Chief Executive Carrie Lam delivered the Policy Address
• Reserve Bank of New Zealand raised the policy rate by 0.25 percentage points to 0.50%, with indications of further rate hikes.
• Eurozone August retail sales +0.3%
• MBA Mortgage Applications −6.9%
• U.S. September ADP employment +567,000
• Carrie Lam unveiled plans to connect Hong Kong to mainland rail and large-scale development in northern Guangdong, arguing that only with central government support can Hong Kong unleash its strengths and repeatedly call for "integration into national development."“Integrating into national development” was emphasized.
• Russian President Putin hinted at early operation for the new natural gas pipeline Nord Stream 2, signaling willingness to increase supply to Europe and Asia if needed to stabilize soaring gas prices.
• British Prime Minister Boris Johnson, in a Conservative Party conference speech, expressed skepticism about loosening immigration controls as a solution to labor shortages in trucking and services, urging instead more investment in hiring and equipment.

7th

• Japan August coincident index 101.8
• U.S. initial jobless claims 326,000
• U.S. federal funds were projected to avoid default as early as the 18th; Senate Majority Leader Schumer said an agreement to extend the debt ceiling into early December had been reached.
• Pfizer and BioNTech announced an application to the U.S. FDA for emergency use authorization of their COVID-19 vaccine for children aged 5–11; if approved, vaccination for this age group would become available in the U.S. for the first time, expanding immunity coverage.

8th

• Japan August current account surplus +¥1.6656 trillion
• India RBI kept policy rate at 4.0%
• China September Caixin Services PMI 53.4
• Japan September Economists Confidence Index: Current Condition 42.1, Outlook 56.6
• U.S. September Employment Situation: Unemployment rate 4.8%, Nonfarm payroll +194,000
• Canada September Employment: Unemployment 6.9%, Non-farm payroll +157,000
• U.S. August Wholesale Inventories −1.1%
• Xi Jinping gave a speech at the 110th anniversary of the Xinhai Revolution, at the Great Hall of the People in Beijing, urging national reunification as an essential historical mission and asserting it will surely be realized.

Glossary of Economic Terms

• GDP = Gross Domestic Product; high growth is favorable
• CPI = Consumer Price Index: many developed countries set a 2% target
• PCE = Personal Consumption Expenditures: closely correlated with consumer prices
• PPI = Producer Price Index: influences CPI
• PMI = Purchasing Manager Index: 50 is the baseline
• ZEW = Leibniz Centre for European Economic Research: 0 is baseline
• NAHB = National Association of Home Builders: 50 is baseline
• NY Fed Manufacturing Index: 0 is baseline
• Philadelphia Fed Manufacturing Index: 0 is baseline
• Richmond Fed Manufacturing Index: 0 is baseline
• Chicago Purchasing Managers Index: 50 is baseline
• University of Michigan Consumer Sentiment Index: indexed with 1966=100
• S&P/Case-Shiller Home Price Index uses the 20-City Composite; an important indicator for housing-market dynamics with large economic impact
• Pending Home Sales Index: contracts signed but not yet closed
• European Consumer Confidence Index: 2000–2020 average set at 100; released as month-over-month
• European Economic Sentiment Indicator: 2000–2020 average set at 100; released as actual values
• Consumer Confidence Index: 1985=100
• Japan Corporate Goods Price Index: 2015=100
• Japan "Economy Watchers" Sentiment Index: 50 is baseline
• Japan Corporate Sector Business Outlook Survey: 0 is baseline

Upcoming Key Economic Indicators and Political Events

11th

• Policy address Q&A session for Prime Minister Fumio Kishida (through 13th)

12th

• IMF World Economic Outlook
• South Korea Bank: Policy Rate
• 08:50 Domestic Corporate Goods Prices (September)
• 18:00 October ZEW Economic Sentiment

13th

• G20 Summit (on Afghanistan)
• IEA World Energy Outlook
• China September Trade Balance
• 08:50 Japan September Money Stock M2 (YoY)
• 08:50 Japan August Machinery Orders
• 18:00 Euro Area August Industrial Production
• 21:30 U.S. September CPI
• 27:00 FOMC Meeting Minutes

14th

• Lower House of Parliament dissolution
• 09:30 Australia September Employment
• 10:30 China September CPI
• 13:30 Japan August Capacity Utilization
• 21:30 U.S. September Wholesale Prices
• 21:30 U.S. initial jobless claims

15th

• 18:00 Eurozone August Trade Balance
• 21:30 October NY Fed Manufacturing Index
• 21:30 U.S. September Retail Sales
• 23:00 October University of Michigan Consumer Sentiment

Next Week and Beyond

• October 19: Dissolution of the House of Representatives
• October 27–28: BoJ Monetary Policy Meeting
• October 28: ECB
• October 30–31: G20 Leaders Summit
• October 31: House election results
• November 2–3: FOMC
• December 14–15: FOMC
• December 16: ECB
• December 16–17: BoJ Monetary Policy Meeting
• January 17–21: Davos Conference

※ From here (“Last Week's Currency Strength/Weakness,” “Global Macro Environment Overview,” “Chart Analysis,” “This Week's Toda’s Trading Strategy”) this is a paid article

Last Week's Currency Strength

• Japanese Yen and Euro, for exampleDollar strength against major developed-market currencies
• Canada, Russia, Norway, etc.Commodity currencies (oil-producing, gas-exporting) holding firm
• Cross yen generally remained firm (yen depreciation)
• Mexico's manufacturing activity has been hamperedand may continue to decline
• The RMB continues to stay at a sustainably firm level
• In summary, currency strength is as followsOil-producing and gas-exporting countries > yuan > US dollar > euro > Japanese yen > emerging markets like Mexico and Turkey

整理 of the Global Macro Environment

• Regarding the default of China real estate giant Evergrande Group, market attention remains high. While the real estate market downturn is expected,the impact is likely to be limited.
• Global focus on China's power shortages. The root problem is that it’s hard to pass through commodity prices to electricity prices. Resources like coal are not in short supply, so this toois expected to have limited impact.
• The ongoing keys are “COVID-19” and the supply-chain disruptions caused by U.S.-China tensions, and the impact on “U.S. monetary policy.”
• The trend of daily new COVID-19 cases continues to decline (the attached chart Daily New Cases shows a downward 7-day moving average)(risk-on factor)
• Global semiconductor shortages are severe. Japanese automakers are boosting inventories; in China, mobile phone production faces constraints, and in Mexico auto production is challenged, indicating microeconomic impacts. This phenomenon raises semiconductor prices and also pushes up product costs,contributing to global inflationary pressures. As a result, globally producer prices stay high, corporate profits are squeezed, and stock prices may face downside pressure.(bearish factor for equities)
• Inflationary pressures lead the US to hint at early tightening at the September FOMC.(dollar strength factor)
• US 10-year Treasury yields continue to rise (close on Friday: 1.61%)(equity-market risk)
• Concerns over US stocks. If the decline is simply due to the縮小 of US monetary easing, it may be a mere correction; however, if it reflects broader global supply-chain disruptions and mid-to-long-term economic weakening, caution is warranted.The author remainsoptimistic at present.
• Investors expect the US monetary policy to taper by November 2021 FOMC, with rate hikes anticipated in the latter half of 2022.(rate-hike expectation centered on September 2022)
• This week market participants pushed up rate-hike expectations (three months earlier than last week).(dollar-strength factor)

  

Chart Analysis

USD Index (Daily)

• Dollar Index is a gauge of overall dollar strength (basket composition: EUR 57.6%, JPY 13.6%, GBP 11.9%, CAD 9.1%, SEK, 4.2%, CHF 3.6%)
• Dollar strength pushes through the 93.4 resistance
• Watch whether it can clear 94.7

USD/JPY Medium-Term (Daily)

• Broke above the Jan–Feb 2019 high of 111.65 and reached the 112 area
• In 2019 April and 2020 February highs,watch whether it decisively clears 112.20
• If broken, the next target is around 114.40

USD/JPY Short-Term (Intraday)

• Currently testing the 112.20 resistance
• If it retreats, a reference level is around 111.50 supported by US employment data

EUR/USD Medium-Term (Daily)

• Breaks below supports at 1.1630 and 1.1570
• With little immediate support,the downside may continue

EUR/USD Short-Term (Intraday)

• Retracement target around 1.1600; plan to sell more on approach

USD/CNH Medium-Term (Daily)

• Broad range considered to be 6.35–6.60
• Expect testing support at 6.4250
• If it breaks lower, target around 6.35

USD/CNH Short-Term (Intraday)

• Core range 6.4250–6.4870
• Center the range at 6.4510; look to sell around this area

This Week’s Todai Trading Strategy

Overall Policy

• Pay attention to crude oil and natural gas prices; if they rise, inflationary pressure is high, suggesting deteriorating corporate earnings and equity declines,risk-offflow to prepare for
• Monitor US rate trends, especially 2-year and 10-year yields, to determine whether dollar buying will continue
• Anticipating prolonged monetary easing in Japan,sell the yen (be mindful of the potential continued Kishida shock)
• RMB has had negative headlines, but for now keep a flat stance and start buying
• Euro has faced a major chart breakout; start selling euro. However, note improving economic indicators.
• Currency momentum judged as followsRMB > USD > EUR > JPY

USD/JPY

• Last Friday close: 112.22
• View: ranging to modestly higher
• Predicted range: 111.50–112.90
• Current position: USD/JPY +-0
• Strategy: start the week with a wait-and-see stance; if it dips, buy around 111.50; if it moves up, place early stop-loss and ride the rally

EUR/USD, EUR/JPY

• Last Friday close: EUR/USD 1.1567
• View: EUR/USD range-bound to down; EUR/JPY range-bound
• Predicted range: EUR/USD 1.1450–1.1630
• Strategy: sell the euro; start with small shorts at week-start, and sell above 1.1600

CNH/JPY, USD/CNH

• Last Friday close: USD/CNH 6.4431
• View: USD/CNH range-bound to lower; CNH/JPY higher
• Predicted range: USD/CNH 6.4000–6.4650
• Current position: USD/CNH +- 0.0 CNH/JPY +1.0
• Strategy: CNH/JPY wait-and-see at week-start; if USD/JPY dips, use a dip-buy; if it moves higher, follow with buys
• USD/CNH: sell above 6.45

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